US Marshals auction a hulking $18M of Silk Road bitcoins and -- good news! -- nosebleed prices held up
The bitcoin market just had a major coming-of-age moment as the US Marshals Service (USMS) auctioned off approximately $18 million worth of bitcoins (at market prices) seized from dark web black marketplace Silk Road. The auction is notable for being the largest recorded sale of bitcoin to date, and as such the first significant stress test for the consumer bitcoin price indexes. It’s also an opportunity to verify institutional demand for the burgeoning crypto-currency.
The USMS split the more than 30,000 bitcoins into nine equal-sized blocks auction each to a list of 45 pre-approved bidders, a partial list of which was accidentally leaked last week. That group included individuals and funds associated with SecondMarket, Bitcoin Investment Trust, Coinbase, Circle Bitcoin Shop, Matrix, BNP Parabas, GE Capital, Yelp, and other entities.
There has been rampant speculation in recent weeks as to how the price would react to this large off-exchange selling activity.
As TBI Daily blogger Ryan Selkis wrote on Friday:
Do assets in government auctions usually sell at significant discounts? Yes. However, this rare opportunity for institutional investors to quickly accumulate large bitcoin positions over-the-counter (off-exchange) could cause the bitcoins, which will be sold in 10 different lots, to sell at or even above current exchange rates.
He continues to reason that investors would be forced to pay a five to 10 percent premium to market prices to buy such large blocks of bitcoin on exchange. This fact means that the USMS would likely be a competitive process attracting long-term investors, as opposed to those looking to quickly flip their crypto-coin purchase for a small price arbitrage – that and quickly selling these coins would effectively tank exchange prices.
"All of this said, it should be pretty clear why this auction is likely to be a non-negative event," Selkis concludes.
Also weighing on the mind of bitcoin investors was the lack of clarity from the USMS, and to a lesser extent the participating bidders, around how much information would be revealed after the auction. For example, would the public know the winning price and bidder for each auction? The Coindesk Price Index rose above $600 over the weekend for the first time in several days, holding that level through to the mid-day auction. It currently stands at $647.76 as of this writing as limited details emerge from the USMS auction.
We have not yet received an official indication of the average price across all nine auctions, but details have emerged from several participants suggesting that the blocks all sold at above-market prices. Selkis and others predicted as much, writing:
To the extent the winning bid somehow closes at a premium to current exchange rates, it seems certain that the bidder would want to divulge that information, given the positive impact such news would have on retail investors.
SecondMarket and Bitcoin Investment Trust (BIT) founder Barry Silbert tweeted earlier today that his syndicate, which saw SecondMarket and BIT place bids on behalf of small and foreign investors, was outbid in all auctions, while his brother Allan Silbert, who is a VP at GE Capital, concludes, "So basically at least USD$20MM of bitcoin buying demand went unsatisfied in the auction and will look elsewhere to buy bitcoins i.e. market." Overall, the auctions seem to send a strong signal to exchange-based bitcoin investors, registering a total of 63 bids among the 45 registered investors.
Bitcoin remains a nascent and largely volatile digital currency, but events like today’s serve to validate its existence. Not only did a US government conduct an auction for these assets valuing them in the millions of dollars, but numerous traditional financial institutions participated in said auctions, ascribing similar value to bitcoins as they would to stocks, precious metals, or other financial assets.
The broader bitcoin market will benefit from continued transparency around these auctions, something we can hope to receive in the coming days. There is another shoe yet to drop when the USMs potentially auctions another 144,000 bitcoins seized from accused Silk Road founder Ross “Dread Pirate Roberts” Ulbreicht – pending court approval. Today’s events show that such an auction can be conducted in an orderly fashion without a disproportionate positive or negative effect on the broader bitcoin market.
Bitcoin is far from a mature market (or commodity or currency, depending on your perspective), but it’s hardly the shadowy internet asset that it was just a few years ago. I saw nothing today to suggest that that maturation won’t continue well into the future.
[Updated, 7/1/14 9:15am: An earlier version of this post inaccurately quoted Alan Silbert as stating that the average bid price for the SecondMarket and BIT syndicate was $665. Silbert contacted Pando to indicate that his statements of unfulfilled demand were misinterpreted by BitcoinBreak.]